Thursday, February 09, 2006

Inventory Management: A Way to Give It a Grade - Knowledge@Wharton

Inventory Management: A Way to Give It a Grade - Knowledge@Wharton: "'The most sophisticated companies in supply chain management realize that responsiveness in inventory management is important.'"

Interesting article on Inventory management in today's Knowledge@Wharton -- the sentence above pretty much sums up the findings. The article's main focus in how an operational issue like inventory management impacts the stock price. However it suggests that because increasing inventory turns doesn't seem to impact stock price it is not important.

Actually my experience tells me something slightly different - you need both Responsiveness AND efficiency. Our company has helped clients increase customer service levels and increase inventory turns. We have done this enough times so that I believe most companies do not operate anywhere near their potential. That is they under-serve their customers carry too much inventory in the wrong places. For those of you with a financial background - they are not operating at the efficient frontier of their business.

For example
Examine the 2 graphics at the top of the column. We helped a manufacturer selling to a large well known retailer. The retailer did the forecasting at a category level and sent purchase orders to the manufacturer every week. In the first picture - you can see the misalignment between sales and inventory. In some places sales where very high but there was not enough inventory, in other place the opposite was true. In their standard process this happened EVERY week. The weeks of supply of inventory was anywhere between 17 and 80 weeks for this category.

In the second graphic shows the measurements AFTER our process was executed. The process includes examining the promotions, Point of Sale (POS) , competitive sales, current inventory positions and manufacturing process. We have been doing this weekly now for 20 weeks and have been able to keep the inventory to 3 weeks +/- 1 week - note this is been steady thru the holiday and more importantly post holiday.

Even the high end of this range - 4 weeks, we are turning inventory 13 times AND the retailers measurement of instock went from 60% to 90+ %! What if you took your highest revenue category and used this type of process - how much capital could you free up AND how much more revenue are you missing. (Our client found that with better instock postions their revenue and their retailers revenue went UP)

Next time I will tell you how we did it and no it was not with RFID